Business Overview and History

Reliance, Inc. (RS) is a leading metals service center provider, offering a diverse portfolio of products and value-added processing capabilities to a wide range of industries. With a rich history spanning over 85 years, the company has established itself as a formidable player in the metals distribution and processing landscape.

Reliance, Inc. was founded in 1939 in Los Angeles, California, originally operating as a small steel service center primarily serving the local construction industry in Southern California. Over the decades, the company has undergone a remarkable transformation, expanding its geographic footprint and diversifying its product and service offerings through strategic acquisitions and organic growth initiatives.

In 1994, Reliance went public, listing its shares on the New York Stock Exchange, marking a significant milestone in its history. This move allowed the company to accelerate its acquisition strategy, completing 76 acquisitions since its IPO. These acquisitions have not only expanded Reliance's footprint across the United States and into Canada but also diversified the company's operations into new end markets and value-added processing capabilities.

Throughout its history, Reliance has faced and successfully navigated various challenges, including cyclical downturns in the metal manufacturing and distribution industry. The company demonstrated its resilience during the 2008-2009 financial crisis through prudent balance sheet management and continued execution of its growth strategy. More recently, Reliance effectively dealt with supply chain disruptions and inflationary pressures during the COVID-19 pandemic, leveraging its scale, diversification, and operational excellence to outperform industry peers.

Reliance's business model is centered around its network of metals service centers, which process and distribute a wide range of metal products, including carbon steel, aluminum, stainless steel, and alloy. The company's value-added processing capabilities, such as cutting, machining, and fabrication, have positioned Reliance as a trusted partner for its diverse customer base, spanning industries like construction, manufacturing, aerospace, and automotive.

Financial Snapshot and Ratios

Reliance's financial performance has been consistently strong, with the company reporting solid revenue and earnings growth over the years. In the most recent fiscal year, the company generated revenue of $14.81 billion and net income of $1.34 billion, reflecting its ability to navigate market volatility.

Key financial ratios paint a picture of Reliance's financial health and operational efficiency. The company's current ratio, a measure of liquidity, stood at 3.31 as of the latest reporting period, indicating a strong ability to meet short-term obligations. The debt-to-equity ratio, a solvency metric, was a manageable 0.18, showcasing Reliance's prudent financial management.

Reliance's return on equity, a measure of profitability, was a robust 13.62% in the most recent fiscal year, demonstrating the company's ability to generate strong returns for its shareholders. Additionally, the company's asset turnover ratio of 1.36 highlights its efficient utilization of its asset base.

Financials

Reliance's financial performance has been a testament to its operational excellence and strategic initiatives. The company's revenue growth has been driven by a combination of organic expansion and strategic acquisitions. The consistent focus on value-added processing capabilities has allowed Reliance to maintain healthy profit margins even in challenging market conditions.

For the fiscal year 2023, Reliance reported revenue of $14.81 billion and net income of $1.34 billion. The company generated operating cash flow of $1.67 billion and free cash flow of $1.20 billion, demonstrating strong cash generation capabilities.

In the most recent quarter (Q3 2024), Reliance reported revenue of $3.42 billion, representing a 5.6% decrease compared to the same period in the previous year. Net income for the quarter stood at $199.2 million, a 32.4% decrease year-over-year. The decline in revenue and net income was primarily attributed to lower metals pricing, despite a 7.1% increase in tons sold.

Operating cash flow for Q3 2024 was $463.9 million, with free cash flow reaching $351.1 million. These figures underscore Reliance's ability to generate substantial cash flow even in challenging market conditions.

It's worth noting that Reliance operates in a single reportable segment, focusing on the distribution and processing of various metal products. Carbon steel products make up the largest portion of Reliance's gross sales, accounting for over 50% of total sales in the nine months ended September 30, 2024. Other major product categories include aluminum (16% of gross sales), stainless steel (14% of gross sales), and alloy (5% of gross sales).

The metals service center industry has seen a compound annual growth rate (CAGR) of approximately 5-7% over the past 5 years, driven by increased demand across end markets like construction, manufacturing, and aerospace. Reliance's performance should be viewed in the context of these broader industry trends.

Liquidity

Reliance's robust liquidity position is a key strength, providing the company with financial flexibility to navigate market uncertainties and pursue strategic growth initiatives. The strong current ratio of 3.31 indicates that the company has ample resources to meet its short-term obligations and operational needs. The quick ratio, another measure of liquidity, stands at a healthy 1.58.

As of September 30, 2024, Reliance reported cash and cash equivalents of $314.6 million. The company's low debt-to-equity ratio of 0.18 further underscores its strong financial position and conservative approach to leverage.

Reliance has maintained access to significant credit facilities to support its operations and growth initiatives. On September 10, 2024, the company entered into a new $1.5 billion unsecured 5-year revolving credit facility, with only $125 million outstanding as of September 30, 2024. This substantial available credit line provides Reliance with additional financial flexibility to pursue strategic opportunities and navigate potential market volatility.

The company's prudent management of working capital, including efficient inventory management and accounts receivable collection, has contributed to its solid liquidity position. This financial strength allows Reliance to capitalize on market opportunities, invest in capacity expansion, and pursue accretive acquisitions when suitable targets become available.

Navigating Market Volatility and Diversification

The metals industry is inherently cyclical, and Reliance has demonstrated its resilience in the face of market fluctuations. The company's diverse product portfolio and expansive geographic reach have been key factors in its ability to navigate volatile market conditions.

During periods of declining metals prices, Reliance's value-added processing capabilities and effective inventory management have allowed the company to mitigate the impact on its gross profit margins. The company's LIFO (last-in, first-out) inventory valuation method has also proven effective in generating LIFO income, which has helped to stabilize its operating results. For the full year 2024, Reliance expects LIFO income to be $200 million, with $50 million anticipated in the fourth quarter.

Furthermore, Reliance's consistent focus on diversification has been a strategic advantage. The company's exposure to a wide range of end markets, including construction, manufacturing, aerospace, and automotive, has helped to offset weaknesses in any single sector, providing a level of resilience and stability.

Acquisition Strategy and Integration

Reliance's growth trajectory has been significantly shaped by its strategic acquisition approach. The company has a proven track record of successfully identifying and integrating complementary businesses, expanding its product offerings, geographic reach, and processing capabilities.

Recent acquisitions, such as the 2024 purchases of Cooksey Steel, American Alloy Steel, Mid-West Materials, and the FerrouSouth division of Ferragon Corporation, have further strengthened Reliance's position in the market. These acquisitions have not only broadened the company's product portfolio but also enhanced its value-added processing capabilities, allowing it to better serve its diverse customer base.

The integration of these acquired businesses has been a key focus for Reliance, with the company investing in infrastructure, technology, and talent to ensure a seamless transition and the realization of synergies. This disciplined approach to M&A has been a crucial component of Reliance's growth strategy, enabling the company to expand its market share and solidify its position as an industry leader.

Sustainability and Environmental Initiatives

Reliance has also demonstrated a strong commitment to sustainability and environmental responsibility. The company has implemented various initiatives to reduce its carbon footprint, including investments in energy-efficient equipment, recycling programs, and the adoption of renewable energy sources at its facilities.

Reliance's focus on sustainability extends beyond its own operations, as the company actively engages with its supplier and customer networks to promote sustainable practices throughout the metals industry supply chain. This holistic approach to environmental stewardship has not only garnered industry recognition but has also positioned Reliance as a responsible corporate citizen, aligning with the growing emphasis on sustainability across various sectors.

Leadership and Governance

Reliance's success is underpinned by its experienced and seasoned management team, led by Karla Lewis, who has served as the company's President and Chief Executive Officer since 2019. Under her leadership, Reliance has continued to execute its strategic growth initiatives while maintaining a strong focus on operational excellence and financial discipline.

The company's Board of Directors, composed of a majority of independent members, provides valuable oversight and strategic guidance to ensure Reliance's long-term sustainability and shareholder value creation. The recent appointment of James K. Kamsickas, a seasoned industrial executive, to the Board further strengthens the company's governance and industry expertise.

Reliance's commitment to transparency and sound corporate governance practices has earned it the trust of its stakeholders, including investors, customers, and suppliers. The company's robust risk management framework and internal control systems are designed to mitigate operational and financial risks, promoting the long-term viability of the business.

Outlook and Conclusion

As Reliance navigates the challenges of a volatile macroeconomic environment, the company's diversified business model, disciplined financial management, and strategic growth initiatives position it well for long-term success. The company's focus on value-added processing, strategic acquisitions, and sustainability initiatives underscore its ability to adapt and thrive in the dynamic metals industry.

Looking ahead, Reliance has provided guidance for the fourth quarter of 2024. The company expects tons sold to be down 6% to 8% compared to the third quarter, but up 4% to 6% compared to the fourth quarter of 2023, with 0.5% to 2.5% attributable to same-store growth. Average selling price per ton sold is anticipated to be down 1.5% to 3.5% compared to the third quarter. Reliance projects non-GAAP earnings per diluted share in the range of $2.65 to $2.85 for the fourth quarter.

It's worth noting that in the third quarter of 2024, Reliance reported non-GAAP earnings per diluted share of $3.64, which was in line with their previous guidance. The company's tons sold increased 7.1% year-over-year, or 3.7% on a same-store basis, significantly outperforming the service center industry decrease of 1.2%. However, Reliance's average selling price per ton sold of $2,246 declined 4.3% compared to the second quarter of 2024, exceeding their expectation of a 2% to 4% decline.

Despite near-term headwinds, Reliance's strong financial position, talented leadership team, and unwavering commitment to operational excellence provide a solid foundation for continued growth and shareholder value creation. The company's Board of Directors has approved a $1.5 billion refresh of their share repurchase plan, demonstrating confidence in Reliance's future prospects and commitment to returning value to shareholders.

As the company continues to execute its strategic priorities, Reliance is poised to cement its position as a leading provider of comprehensive metals solutions, catering to the diverse needs of its customers across a wide range of industries. With its proven ability to navigate market volatility, strong liquidity position, and focus on value-added services, Reliance, Inc. remains well-positioned to capitalize on future growth opportunities in the dynamic metals industry.